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Unilever's Struggle For Growth

July 03, 1994

The Corporation

UNILEVER'S STRUGGLE FOR GROWTH

It was billed as the soap story of the century: By early 1994, Unilever, the Anglo-Dutch company that has made brighter washes its business for 106 years, was ready to launch a new detergent in a Europewide extravaganza. Company executives were eager to best archrival Procter & Gamble Co., which drubbed Unilever in a recent U.S. price war and was grabbing a big lead in Europe. With Unilever's stock price getting battered and profits slipping, this one had to be a hit. Or else.

But P&G was working to counter the new offensive. In February, one of Procter's researchers, Nabil Y. Sakkab, got his hands on a box of the new powder. He sifted the detergent through his fingers, noticed pinkish granules, and said: "I can't believe they did this." Sakkab rushed the soap into a lab, which revealed, as he suspected, the granules contained manganese. The substance can clean clothes whiter than white but can eventually tear holes in them. In May, P&G released lab tests and pictures of clothes allegedly eaten alive by the new detergent, called Persil Power in Britain and Omo Power elsewhere.

BIG STRAIN. Suddenly, the blockbuster started to look like a bust. Tests by consumer groups in late May confirmed P&G's findings that, even at low temperatures, the new detergent weakens fibers in as few as 15 washings. Incredibly, Unilever may have failed to put the product through sufficient testing. Unilever officials say they spent three years testing the new detergent in the lab and with consumers. Nonetheless, the company is changing the formula and the instructions for its use and withdrawing a lawsuit charging defamation against Procter & Gamble. Now, instead of sweeping rivals off the shelves, Unilever faces a slog to recoup $400 million it invested.

This is just one of many wars the octopus-like Unilever is fighting around the world. With $42 billion in sales, 1,000 brands, and 300,000 employees, Unilever is mired in battles over ice cream, soap, margarine, shampoo, and sauces. Sometimes the opponents are name brands like P&G's Ariel detergent in Europe or Tide in the U.S. Sometimes they are newcomers--like Snapple iced tea.

Whoever the rivals are, Unilever has to fight them off while dealing with a European recession, slowgrowing populations in its mainstay markets, and gigantic increases in advertising and promotion costs. It's a strain on management, a strain analysts say contributed to the soap-powder controversy. "The last year has been a bit of a nightmare for Unilever," says David P. Lang, a London analyst at Henderson Crosthwaite.

The problems come at a critical juncture. As profits in the developed markets stagnate, Unilever is shifting its weight to Asia, Latin America, and Central Europe. Unilever already has a decades-old presence in such places as India, where the promise is great. But Unilever has also run out of experienced managers to handle it all. "Unilever is meeting its limits," admits Co-Chairman Morris Tabaksblat in Rotterdam. "It can be quite painful because there are opportunities out there."

The detergent war in Europe is the first real test of Tabaksblat and fellow Co-Chairman Sir Michael Perry. Because Unilever is the result of a 1930 merger between a Dutch margarine company and a British soapmaker, it has maintained two equally powerful chairmen. In May, Tabaksblat started his tenure in Rotterdam. Perry has been running Unilever's London headquarters since April last year. Together, they must make their twin-headed organization and its 300 operating divisions respond faster to newly aggressive rivals.

Perry and Tabaksblat have tremendous resources to work with. Unilever's cash flow is more than $3 billion a year. It dominates global markets in such products as margarine and ice cream. In some emerging markets, Unilever is a titan: It has 90% of Chile's detergent market, for example. In the U.S., where its detergent business has sagged badly, executives have nonetheless produced big hits with global potential--Lever 2000 soap, for example, and Lipton bottled iced teas, sold in partnership with PepsiCo Inc.

The question is whether Unilever can capitalize on these strengths and turn itself into a nimble enough player for today's hypercompetitive world. The drive to be faster and smarter collides with a culture that for decades stressed geographic decentralization--where country managers were kings. With such balkanized operations, Unilever's bid to keep rolling out the best products globally in the shortest time is at stake. Mistakes can be costly. "Losing a fight over market dominance isn't just a blow to the corporate ego, it means forgoing hundreds of millions of dollars in sales that may never be recovered," says Paribas Capital Markets analyst John H. Campbell.

GREEDY. The numbers also reflect a company in need of new growth. After restructuring charges and adjusting for currency shifts, pretax profit for the year ended December, 1993, fell 9%, to $2.9 billion, on a 6% sales rise (chart). Next year's earnings should grow to $3.5 billion--unless another writedown takes place, says S.G. Warburg & Co. analyst Mark Duffy. But margins are still under pressure.

The market is waiting to see if Unilever can regain its momentum. In the U.S., shares of Unilever PLC have slipped--from almost 73 in January to a recent 61. Major investors are wondering when the $1.6 billion in restructuring costs will boost earnings. "They've been treading water for a couple of years," says Jay H. Freedman, a fund manager at Lincoln Capital Management Co. in Chicago.

A big reason for the stock slip is investor concern over whether Unilever, along with other consumer-goods companies, can coax shoppers into paying premium prices. In the past year, consumers have rejected Unilever's higher-priced teas in Britain, Ragu and Chicken Tonight meal sauces in the U.S., and margarine in Germany. In each case, "we were asking too much. We got greedy," says Tabaksblat.

Rivals are all waiting for a chance to stop Unilever. In ice cream, Unilever is No. 1--but Nestle is snapping up properties, determined to contest the issue. In India and Brazil, Unilever wants to consolidate its hold, but P&G, Colgate-Palmolive, and Nestle are resisting. In food sauces in the U.S., products from Newman's Own spaghetti sauce to Campbell Soup's Prego line have undermined Ragu's dominance. In hand soap in the U.S., it's a seesaw battle: Unilever has beaten out P&G with its Dove, Caress, and Lever 2000 brands, but the Cincinnati company is fighting back.

Perry and Tabaksblat seem to have a common vision for how Unilever must respond. The essence of their strategy is to keep stripping Unilever's broad array of products down to four categories: foods, personal products, detergents, and specialty chemicals. In foods, it's pasta sauces, tea drinks, margarine, and ice cream. In personal products, it's prestige fragrances, cosmetics, and anti-aging skin creams. They're also want new efficiencies by building plants that serve entire continents, not just one country.

Perry, 60, and Tabaksblat, 56, have also hit upon a highly unusual solution to the age-old problem of balancing headquarters, brand managers, and country managers: Instead of expanding the control of Rotterdam or London, they're delegating the job of developing products and marketing strategies for an entire region. In Southeast Asia, that means Thailand is the detergent expert, and the Philippines handles manufacturing. In Europe, the Paris office oversees shampoo, while the Frankfurt office does skin care. Thus one country develops new products and creates marketing campaigns for the whole region.

The co-chairmen monitor these new operating regions closely with a sophisticated electronic-mail system. They're getting tougher on weak performers, shutting down plants, laying off workers, and jettisoning products that don't fit the overall strategy. Among the changes: a $750 million charge against 1993 earnings to close or consolidate 60 plants and lay off 7,500 workers.

The new, streamlined European detergent operation, which just handled the launches of Omo Power and Persil Power, was supposed to be a model. Niall FitzGerald, the worldwide detergent coordinator who is widely assumed to be Perry's heir, had just finished melding 18 separate country units that often marched to their own drummers into Lever Europe. That allows it to land new products on shelves in a matter of weeks, instead of years--the kind of speed every major marketer wants. But the new efficiency can amplify mistakes. In the past, a serious problem would have been corrected early, in part because rollouts weren't rapid enough to let a problem spread.

The U.S., where the company has 25% of total assets that deliver only 13% of profits, remains a major problem as well. First-quarter operating profit on $2 billion in U.S. sales was a mere $15 million, down 50% from a year ago. To cut costs, the U.S. detergent division, Lever Brothers Co., is cutting 25% of 4,200 jobs and is shutting a Los Angeles plant. Three different consulting companies have been called in to help with the reorganization at Lever, which lost money in the first quarter this year. A second plant, making pasta sauces, is closing in New York.

Lever Brothers' decline is due to a market-share war with P&G, which cut prices by as much as 20% on most of its products and hiked ad spending. To retain share, Lever also had to cut prices and boost its ad budget. But Lever's own marketing bloopers also hurt. Most dramatically, Lever's share of the liquid detergent market has plummeted from 35% to 27% in the past year, according to Information Resources Inc.

First, P&G beat it to the market with a concentrated liquid. Determined to offer a superefficient detergent, Lever doubled the concentration and halved the bottle size, making its products smaller than P&G's. The consumer just wasn't impressed. Says an executive at another detergent supplier: "Sooner or later, they seem to make whopper mistakes, which Procter doesn't."

While the company sorts out its headaches in the industrialized world, Unilever is spending much more time and money in emerging markets, where it now derives one-third of its profits. In 1992 alone, it launched 30 new products in Brazil, where sales last year came to $2.2 billion. Not far behind is India, with $1.3 billion in sales. By Western standards, consumption in these countries is still small, giving Unilever a chance for rapid growth. The strategy: Buy market share and end competition by acquiring existing companies. The question is whether profits in the developing world will come on stream fast enough to help compensate for the wars in Europe and the U.S.

Unilever is doing well in some of those battles, like personal products. Unilever is No. 3 in the world in this sector, trailing P&G and L'Oreal, but it's gaining ground fast, having entered the business in only 1989. Last year, personal-product sales jumped 10%, to $6 billion, and operating profits were up 8%, to $620 million.

In this case, the decentralized model works. The business is managed worldwide from New York, where the stars are Elizabeth Arden cosmetics and skin-care products, managed by CEO Robert Philips, and Calvin Klein perfumes, run by Kimberly Delsing, one of a few women among Unilever's top 100 managers. They have been given almost free rein by personal-product coordinator and board member Antony Burgmans. Perry boasts that Arden, "a somewhat tired and feglected brand when we bought it" from Eli Lilly & Co. in 1989, is now one of Unilever's biggest success stories. Unilever also triumphed in turning Pond's, a U.S. brand, into a global workhorse, especially in Japan.

The successes in big developing markets and in fields such as personal products are examples of how Perry and Tabaksblat want their company to work. With missteps like the latest detergent rollout still occurring, however, the ideal of a perfectly organized, nimble giant still eludes them. Stretched thin and under pressure on so many fronts, Unilever may remain a company on the firing line.UNILEVER TARGETS THE GLOBE...

The company is focusing on brands it can roll out around the world. But the sheer variety of products, combined with competitive pressure, makes for a formidable management challenge

FOOD AND BEVERAGES

1993 SALES $22.2 BILLION

Includes Lipton tea and iced tea, Good Humor and Breyers ice cream in the U.S., Blue Band margarine in the Netherlands, Rama margarine in Japan, Wall's ice cream and Birds Eye frozen vegetables in Britain

DETERGENTS AND SOAPS

1993 SALES $10.1 BILLION

Includes Surf and Wisk detergent, Dove and Lever 2000 soap in the U.S., Omo and Persil detergent in Western Europe, Pollena detergent in Poland, Wheel soap in India, Jif cleanser in Japan

PERSONAL PRODUCTS

1993 SALES $6.2 BILLION

Includes Calvin Klein and Elizabeth Arden cosmetics in the U.S. and Europe, Mentadent toothpaste and Vaseline Intensive Care in the U.S., Timotei shampoo in Europe, Sunsilk shampoo in Japan, Maxam toothpaste in China

OTHERS $3.5 BILLION

Paula Dwyer in London, with Zachary Schiller in Cleveland, Laura Zinn in New York, Shekhar Hattangadi in Bombay, and Lynne Curry in Beijing